When Bitcoin debuted in 2009, everyone was excited about how this disruptive technology would change the game of moving money from one part of the world to another over the internet. Bitcoin was supposed to allow “Instant payment” around the world, but later the scene soon changed. As more and more people started using it, the time it took to confirm transactions began to increase, leading to slower transaction cycles and increased costs. There were times when fees skyrocketed to an all-time high of over $30 per single transaction. This made Bitcoin unreliable for microtransactions because no one would want to pay fees that were sometimes much higher than what they are actually shopping for. Over the period of time that this problem became manifest, the Bitcoin developer community proposed several solutions to tackle this issue. One of such solutions was the Lightning Network.
What is Lightning?
Simply put, Lightning is a technology which allows faster and cheaper Bitcoin transactions by creating separate and private layers on an inter-party basis on top of the blockchain. This private layer or channel is governed by rules that have to be signed by both parties before any transactions can take place. However, these transactions are then recorded on a local ledger and do not go to the main blockchain. Another set of rules which define a termination date and time after which the transaction record will go to the main blockchain ledger are usually established within the private channel.
How Does Lightning Network Work?
To put this into perspective, let us demonstrate a real-life scenario of how Lightning Network works. Peter and Paul create a private channel to transact between themselves. Peter has 5 BTC and wants to send 1 BTC every day to Paul over 5 days. In the private channel created, there will be 5 transactions between Peter and Paul but when they decide to terminate this transaction and commit to the blockchain ledger, only a single transaction will show up indicating that Peter pays 5 BTC to Paul. Technically, this has reduced the size of the public ledger on blockchain as well as making the entire transaction scale a lot better than using traditional blockchain nodes.
Additionally, the Lightning Network allows Bitcoin transactions to be locked between two wallets and then sends a copy of the transaction to the network, This only becomes real when it is added to the blockchain. On-chain transactions cost more money to execute but this is not the case with Lightning Network. Lightning is an off-chain network, and every change in the transaction is updated until the channel closes. Channel closure is where the final transaction gets committed on the blockchain.
Benefits of the Lightning Network
What are the benefits that the Lightning Network brings to the use of cryptocurrencies for transactions?
Low Transaction Costs
The Lightning Network will cut transaction costs, making micropayments viable and possible. Previously, micropayments were not possible or at least not cost-effective before the implementation of Lightning Network. Transaction fees were as high as $30 per transaction but now a fraction of that can be paid to finalized transactions.
Payments are settled instantly at the speed of light. Money sent is received the moment it leaves its source, typically a fraction of seconds.
There is improved privacy because not every transaction is recorded on the public blockchain. Transactions are only recorded once the private channel created is closed and balance paid out to both parties.
The Lightning Network allows millions of transactions per second, unlike traditional blockchain which allows only 7 transactions per second because of the size of its node.
Lightning Network keeps Bitcoin blocks smaller, allowing more users to run a full node, self-authenticate Bitcoin transactions, enforce Bitcoin’s rules, and keep Bitcoin’s Network decentralized.
Limitations of the Lightning Network
The Lightning Network has some limitations. These are:
Both parties have to be online before a transaction can take place on the Lightning Network. In other words, no payments can take place when one of the parties is offline. If one of the parties is offline or unresponsive, the other party has to wait for hours before the channel is closed for the funds to be sent via an alternative route.
A sufficient quantity of Bitcoin has to be dedicated to all the transactions that you want to carry out. For instance, if you want to pay all your employees for the next year, you need to transfer all the years’ worth of Bitcoins into the private channel before any transaction can take place.
If you want to send some Bitcoins through the Lightning Network, each of the intermediary channels needs to have equivalent Bitcoins balance before they can handle the transaction. For instance, if party A wants to send 1 BTC to parties B and C, each of the parties combine the need to have at least 1 BTC in their respective wallets before the transaction can take place. This is a big scaling issue.
Using the Lightning Network
Experiencing the Lightning Network is pretty simple depending on the option you choose to set up. There is web-based, desktop and mobile phone services that allow you to start using the Lightning Network wallets right away.
There are several online services that allow you to use the Lightning Network wallet right from the web without the need to set up any configuration. One of those trusted services is htlc.me created by Alex Bosworth. But do remember that you have to ask your other party to set up the same web service on their browser before you can send payments back and forth.
Currently, there are two trusted desktop wallets designed with non-technical users in mind; the native Lightning app and Zap wallets. Both wallets support the back-end client as the Lightning Network Daemon (LND) so users can use both apps to check same balance and channels. Zap wallet has been a preferred option for beginners because it is designed to provide easy to use access. It is currently being developed by Jack Mallers and has a community of developers where everyone can contribute in an open-source environment.
Mobile Phone Wallet
Because the Lightning Network is a standardized protocol, lots of developers continue to contribute to the software implementation. One of such groups is the Éclair Group, which has successfully created the first Lightning-enabled Android app. The app is easy to use and has an awesome feature that allows users to establish a channel with Éclair node using a one-click button.
To sum things up, Lightning Network is a disruptive technology that has the potential to improve the long-term scalability issues of Bitcoin. Lightning Network has made Bitcoin economically viable for microtransactions as well as increased transactions speed by million folds.